Important Update on Tariffs and Their Impact on the Construction Industry

Recent Tariff Announcements and Trump Administration Updates

• Steel and Aluminum: As of March 12, a 25% tariff on many steel and aluminum imports worldwide is in effect. These tariffs are in addition to a 200% aluminum tariff that has been in place since March 2023.
• Canadian, Mexican, and Chinese Construction Materials: President Trump imposed tariffs on imports from major trading partners, including a 25% tariff on Mexican and Canadian imports, a 10% tariff on Canadian energy, and a 20% tariff on Chinese goods. These wide-sweeping tariffs affect various construction materials. Furthermore, President Trump imposed docking fees ranging from $500,000 to $1.5 million each time a Chinese-built ship docks at a US port, increasing shipping costs for many Chinese imports.
• Lumber: Lumber imports continue to be subject to fluctuating tariffs. On March 2, President Trump issued an executive order launching an investigation into the impact on US national security and economic stability caused by reliance on imports of timber, lumber, and their derivative products. Derivative products include paper, furniture, and cabinetry. The United States relies on foreign lumber for about 25% of its lumber use, approximately 80% of which is imported from Canada.
• Copper: On February 25, President Trump signed an executive order launching an investigation into the national security and economic stability threats posed by America’s dependence on copper imports. The investigation is set to involve the effects of imports of copper in all forms, including but not limited to, raw mined copper, copper concentrates, refined copper, copper alloys, scrap copper, and derivative products. The investigation’s results could lead to tariffs on copper.

In addition, retaliatory tariffs from trading partners could further exacerbate economic volatility in the construction industry. US construction equipment and materials that are exported to other countries may face reduced demand due to increased costs from tariffs. This can lead to a decrease in sales for US manufacturers, potentially resulting in lower production levels and job losses within the industry. Additionally, the imposition of tariffs and the potential for ongoing trade disputes create an uncertain environment for investment. Construction companies may be hesitant to invest in new projects or expand operations due to concerns about future market conditions and costs.

Material Price Increases

The anticipation and implementation of these tariffs have already led to notable price increases for key construction materials. Prices for steel, aluminum, and other essential materials surged in January as contractors rushed to stockpile materials before the tariffs took effect. This trend may further squeeze project budgets, potentially leading to project delays and cancellations.

For projects underway, project owners may be protected under Fixed-Price and Guaranteed Maximum Price contracts, under which contractors may be contractually obligated to absorb the cost. Conversely, Cost-Plus and Time and Materials contracts may expose project owners to higher project costs.

Future projects will likely see contractors incorporating tariff costs into proposed project pricing and contingency budgets, with a reluctance to agree to Fixed Price or Guaranteed Maximum Price contracts without increasing anticipated pricing.

Effects on Existing Supply Chain Disruptions and Project Schedules

Though the construction industry has been facing significant supply chain disruptions unrelated to the tariffs, fluctuating tariffs have fueled concerns about prolonged supply chain issues and project delays. To mitigate tariff impacts, some contractors are pre-purchasing materials and increasingly sourcing materials domestically, leading to a scarcity in American-made resources. These material shortages and longer lead times may become more common, impacting project schedules. Contractors and owners may consider material substitutions and incorporation of longer lead times into project schedules to mitigate these challenges.

Conclusion

President Trump’s tariff policies are rapidly evolving. It is crucial to stay informed and adapt to these changes. Projects not yet under contract might be deferred, and lenders could adjust debt issuance criteria due to potential reduced profitability in development, which could affect the ability of borrowers to service and repay loans. Reviewing current contracts to assess the impact of the tariff changes is one way to stay on top of potential financial repercussions. When negotiating future contracts and project schedules, consider the effect of tariffs and supply chain disruptions by including clauses that address price adjustments due to unforeseen impacts and explore applicable tax incentives, such as New York’s 485x tax affordable housing incentive.

Our Construction group is continuing to assess the impact of the tariffs on the construction industry. If you have any questions, please reach out to us.